You can buy a Big Mac in the US for $3.06, for the equivalent of $1.27 in China but it would cost you $6.67 in Iceland.
According to the Economist, “burgernomics is based on the theory of purchasing-power parity (PPP), the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.”
According to the index the Icelandic króna (ISK) is 120% overvalued in comparison to the US dollar.
The Economist points out some flaws in the PPP idea including trade barriers, transport costs and differences in taxes that drive a wedge between prices in different countries. The price is also determined by the cost of retail space in which the Big Mac is served and the labor.
One year ago Iceland placed second on the index, with a Big Mac costing $6.01, just behind Kuwait´s $7.33 Big Mac. Kuwait was not included in this year´s Big Mac Index